Australia: Personal Property Securities Bill 2008

Draft Of Commonwealth Bill For Personal Property Securities
To Replace Over 70 Pieces Of Commonwealth, State And Territory
Law

On 16 May 2008, the Federal Attorney-General McClelland
released a draft of a Commonwealth Bill for personal property
securities ("PPS") to replace over 70 pieces of
Commonwealth, State and Territory law.

the creation of valid security interests in personal
property and priority of competing security interests in
personal property;

when a person acquires personal property free of a
security interest; and

enforcing security agreements upon default by the
debtor.

A national PPS Register is also proposed so that security
interests can be searched on a centralised online database.

Increase Certainty And Consistency, Reduce Complexity And
Costs

The impetus behind the PPS Bill is to increase certainty and
consistency and to reduce complexity and costs. Mr McClelland
believes that, "[c]urrently, PPS is regulated by
inconsistent and duplicate laws and registers. A streamlined
national system will deliver greater certainty and cheaper
finance to individuals and business".

The consultation draft of the PPS Bill has been made
available for submissions until 15 August 2008. It is proposed
that the start of the PPS regime will be in May 2010.

What Are PPS?

Personal property is defined in the PPS Bill as
"property (including a licence) other than land".
Therefore, the PPS Bill covers all tangible and intangible
property other than land and buildings.

In the PPS Bill, "security interest" is defined as
"an interest in personal property provided for by a
transaction that in substance secures payment or performance of
an obligation". Some examples include a charge (fixed or
floating), a chattel mortgage, a hire-purchase agreement and a
pledge. The PPS Bill goes further to specify that a
"security interest" also includes other transactions,
whether or not the transaction secures payment or performance
of an obligation, including an interest provided for by a
transfer of an account or chattel paper, a lease for a term of
more than one year and a commercial consignment.

Attachment And Perfection Of Security Interests

The PPS Bill introduces the concepts of
"attachment" and "perfection", which are
central to the issue of priority of security interests.

A security interest "attaches" to personal
property when all of the events necessary for the creation of
the security interest have taken place. The "devil is in
the detail", however under the PPS Bill, generally, a
security interest will "attach" to personal property
when:

the secured party has given value; and

the debtor has rights in the collateral.

If the security interest is to be enforced against a third
party, a security interest will only "attach" if the
above events have taken place and the secured party has
complied with the "enforceability rules". These
"enforceability rules" are, generally speaking, that
the security agreement must be evidenced in writing, signed by
the debtor and contain a description of the collateral.

The enforceability of security agreement is to be governed
by its terms. However, security agreements are only enforceable
against third parties when the secured party has possession
and/or control of the collateral or where the security
agreement is in writing and meets certain requirements.

"Perfection" refers to when a security interest
has "attached" to personal property and the secured
party has registered it on the PPS Register or taken possession
and/or control of the collateral. When a security interest is
"perfected", the secured party has protected their
security interest from competing security interests.

Priority Rules

The PPS Bill provides general and specific rules for
determining priority, for enforcement purposes, among competing
security interests. The general rules are set out in the below
table:

Competing Interests

Priority

Perfected security v unperfected security

Perfected security

Security perfected by control v security perfected
over other means (including registration on the PPS
Register)

Security perfected by control

Perfected security by control v perfected security by
control

First in time (i.e. priority is determined by the
order that the interests were perfected by control)

Security perfected over other means (including
registration on the PPS Register) v security perfected
over other means (including registration on the PPS
Register)

First in time (i.e. priority is determined by the
order of continuous registration and/or possession)

Unperfected security v unperfected security

First in time (i.e. priority is determined by the
order of attachments of the security interests)

There are also specific priority rules apply to a purchase
money security interest ("PMSI") which are discussed
generally below.

Purchaser Money Security Interest

PMSI is defined in section 24 of the PPS Bill and is
essentially where the secured party has provided the finance
required by the grantor to acquire the collateral, but does not
a sale and lease back arrangement.

PMSI's have "super-priority" over the same
collateral (which has been granted by the same grantor) which
has been perfected by registration or possession. However, a
security interest which has been perfected by control has
priority over a PMSI.

Processes For Enforcement

The PPS Bill sets out the processes for enforcing security
agreements following default by the debtor. These provisions
are proposed to operate in conjunction with the enforcement
provisions in the Consumer Credit Codes and security agreements
between the parties.

Parties may contract out of enforcement but the extent of
contracting out depends upon whether collateral is consumer
property.

If the debtor is in default, the secured party may initiate
enforcement action (i.e. seize collateral) regardless of their
priority. However, a higher-ranking secured party can obtain
the collateral from a lower-ranking secured party who has
gained possession of collateral after initiating enforcement
action.

The PPS Bill also contains detailed provisions in relation
to disposing or retaining of collateral. All remedies are
subject to a duty on the enforcing party to act in a
commercially reasonable manner.

Extinguishment Rules

Perfection of a security interest in personal property is
generally sufficient to ensure that a secured party can enforce
their security interest against third parties. However, part 5
of the PPS Bill sets out the circumstances where a security
interest, including a perfected security interest, can be
extinguished.

A security interest may be extinguished where the transferee
(i.e. third party) does not have any knowledge of the security
interest or the fact that a particular transaction constitutes
a breach of the security interest.

Property Free Of Security Interests

The PPS Bill provides that third parties acquire personal
property free of a security interest in a number of different
circumstances, including where the:

security interest in the personal property is
unperfected; or

personal property is: purchased in the ordinary course of
business; not serial numbered and meets certain requirements;
serial numbered but is not listed in the PPS Register; cash;
an investment instrument; or "temporarily
perfected" (a concept referred to in the PPS Bill and
beyond the scope of this e-alert).

PPS Register

It is proposed that a PPS Register will be established and
maintained by a Registrar of PPS. The PPS Register will contain
collateral registrations of personal property. The collateral
registrations will be made by secured parties that have entered
into a security agreement or where a security interest has
attached to the property.

The Effect Of The PPS Bill On Industry

The PPS Bill will affect almost all industries including
automotive, banking, financial services, agriculture,
transport, manufacturing and many commercial arrangements. If
you believe that your business will be affected by a specific
provision and you would like us to prepare a submission on your
behalf, please do not hesitate to contact us. If you have any
other concerns or queries please let us know.

We will continue to keep you updated as developments on the
PPS Bill unfold.

The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.

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The instrument seems to contain the transitional provisions, but on closer inspection we see interpretational ambiguity.

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